Pensions black hole threatens BT payout

BT may be forced to slash its dividends after Britain's pension regulator expressed its deepening fears over the £9bn shortfall in the telecom giant's retirement scheme.

In a revelation that dismayed investors, debt-laden BT admitted that the watchdog was far from satisfied with its plan to tackle the UK's largest ever private-sector pension deficit.

Under an agreement struck with the guardians of the £34bn scheme, BT will pay a £525m top-up into the fund for three years, rising to £583m the next year and then growing by 3 per cent annually thereafter.

Bleak: BT workers are facing a £9bn shortfall in the firm's retirement scheme

But the 17-year recovery programme has yet to pass muster with the watchdog, which harbours 'substantial concerns' over the proposals, BT revealed.

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The regulator has the power to tear up the plan that BT has thrashed out with its trustees and force it to pay more into the 340,000-member scheme.

News of the watchdog's unease raised fears that BT will have to channel even more cash into its retirement pot, leaving less for shareholder payouts.

Pensions expert Ros Altmann said: 'The regulator can compel BT to put more into the scheme, rather than pay out dividends. The debt that BT owes to the pension fund ranks above any obligation to its equity holders.'

Shares in BT plunged 11.5p or 8.8 per cent to 120p - its steepest drop since last March.

The telecoms group declined to explain why its recovery plan had failed to gain the approval of the watchdog. But experts believe the main sticking point is the near two decades that BT has requested to plug the yawning gap in its retirement scheme.

Pension consultant John Ralfe said the proposed timeframe was 'much longer than the ten-year guideline, and much longer than would be expected of a company not only not in financial distress but that also pays dividends'.

After a series of profit warnings at its IT services wing, BT is some way from restoring its finances to rude health.

Cash flows are expected to rise to £1.7bn in the financial year ending in March. But out of this will come the £525m pension top-up plus dividend payouts expected to exceed £500m. BT must also set aside cash to pay down its £10bn debt and invest for the future.